Expansionary fiscal policy backfires: WB

The World Bank (WB) says Zimbabwe’s expansionary fiscal policy, especially during the periods before the recessions, contributed significantly to economic instability, undermining growth.

According to the global financier, Zimbabwe’s economy was in recession in the periods 2000–08 and 2019–20 and that, coupled with a difficult business environment, served to limit economic activity and disincentives investment.

The WB in its Country Economic Memorandum (CEM) for Zimbabwe report, said weak revenue mobilisation, coupled with surges in spending due to a large public wage bill, agriculture spending, and transfers to state owned enterprises, resulted in periodic shortfalls in public finances.

“Limited access to external financing meant that fiscal deficits had to be primarily financed through monetary financing and quasi-fiscal activities (QFAs), stoking inflation,” said the WB.

It added such practices were especially pronounced in the periods of 2005–07 and 2016–18 that preceded the two recessions.

“While some spending pressures have been recently addressed and public financial management reforms are underway, risks for the budget remain high and need to be managed carefully so that price volatility can be contained.”

According to Marjorie Mpundu, the World Bank Country Manager, the country’s CEM is a predecessor of the last CEM that was done for Zimbabwe a few generations ago, in 1985.

The World Bank produces CEM reports in all countries that it works in. The reports take a long-term view of economic developments in the country and recommend policy options to support inclusive economic growth and poverty reduction.

The report indicated that significant and extensive support to the agriculture sector imposed considerable pressures on macroeconomic policy as a large proportion of support to the agriculture sector was financed by QFAs and an increase in contingent liabilities.

It said this support took many forms such as subsidies to farmers for purchases by the Grain Marketing Board (GMB), the provision of inputs (fertilisers and seeds) to maize contract farmers and for free to vulnerable households, the provision of equipment, and cross-subsidised electricity.

It added the capitalisation of Agribank, the bailout of banks with high exposure to agriculture (2015), guarantees to banks (since 2020), and farmers’ compensation, all of which added US$3,5 billion to public debt.

“Agriculture spending in the budget was subject to significant spending overruns and limited transparency on allocative efficiency, especially of command agriculture.

“However, despite significant public spending on agriculture, food insecurity remains high, while agricultural productivity is one of the lowest in the region,” said the WB.

The WB report indicated that price
instability, low investment, and limited structural transformation remain key economic management challenges that need to be addressed.

It said lax fiscal and monetary policies, coupled with multiple exchange rates, were primarily responsible for price instability.

“Price volatility was a key feature of the recessions in 2000–08 and 2019–20 that, coupled with a difficult business environment, served to limit economic activity and disincentivise investment.

“After bottoming out in 2021, inflation is on the rise again, returning to triple-digit levels in June 2022, with the local currency weakening at a rapid pace,” read part of the report.

The WB report said the country’s fiscal management was particularly undermined by high public employment costs, partly because of inefficient spending controls, which allowed spending overruns and the inclusion of “ghost” workers.

It noted Zimbabwe had one of the largest wage bills in the Sub-Sahara Africa (SSA) region, growing from 7,6 percent of GDP in 2010 to around 14 percent of GDP in 2018.

“An audit of public servants’ wages and corrective follow-up actions, including tackling the issue of ‘ghost’ workers and slower adjustments for inflation, helped reduce public sector employment significantly.

“However, wage spending continues to exceed targets, the pay scale structure remains inadequate, and the allocation of public service employment across sectors is not conducive to effective public service delivery.

“Despite several pay increases, high inflation has significantly eroded the incomes of public sector workers, particularly for teachers and nurses, with damaging impacts on the education and health sectors.

“Further efforts to improve the real wages of public servants have not been accompanied by measures to reduce inefficiencies in employment and pay structures,” reads part of the report.

Moreover, it noted, a large number of unprofitable, commercial state owned enterprises have had an adverse impact on public finances and in recent years, Zimbabwe’s extensive commercial State-owned enterprises have required considerable fiscal support of around 11 percent of GDP, between 2011 and 2018 and RBZ-financed QFAs.

“Despite this, a difficult economic environment, coupled with the impact of the pandemic, has worsened the financial outlook of SOEs. Several major SOEs are insolvent, while others are suffering from severe liquidity issues.

“As a consequence, most SOEs are in arrears: unable to adequately fulfil debt and payment obligations or deliver goods and services,” said WB.

The WB said exchange rate policies have significantly disrupted the economy and Zimbabwe had a multiple exchange rate system in 2000–08 and 2018–21, including a parallel exchange rate, an interbank rate, and an official rate.

The report indicated that a parallel market developed because of excessive monetary growth, weak economic fundamentals, including a large trade deficit, and foreign exchange controls imposed by the government to prioritize foreign exchange for key industries and imports.

“Moreover, frequent policy changes in relation to the currency, dedollarisation, a dollarisation ban, plus restrictions placed on foreign exchange trading have increased uncertainty and raised volatility.”

Meanwhile, the WB said despite various economic setbacks, Zimbabwe regained lower middle-income country (LMIC) status in 2018 and aspires to become an upper middle-income country (UMIC) by 2030.

It said Zimbabwe’s economic structure is closer to UMICs’ averages in terms of sectorial shares of the Gross Domestic Product (GDP), but the employment structure resembles more that of low-income countries (LICs), with employment in agriculture accounting for two-thirds of total employment.

The global financier said authorities have made progress in stabilising the economy and reforming the business environment, but significant structural, institutional, and economic challenges still remain in order to achieve Vision 2030.-ebusinessweekly